Rebates, special pricing agreements, claim-backs, contract support are all very similar and at the same time quite different to each other. In essence they are all terms for the money that wholesalers claim from suppliers and manufacturers for selling their products. Some of the key differences lie in how the agreements are formed, whether goods are actually ever handled by the wholesaler, and how the claims are made.
Collectively, they are sometimes referred to as “vendor monies”. It is estimated that, annually, these amount to $600bn in North America and perhaps as much as $500bn in Europe.
In a world where margins are tight, wholesale distributors across nearly 50 sectors rely so much on vendor monies that their absence would be a serious dent in their profit margin.
Where margins are as low as 4%, a 2% change in price means a whopping 50% more profit!
In wholesale distribution, vendor monies represent somewhere between 2.4% and 16% of COGS. Yet, many leave the management of this money to spreadsheets or, worse still to trust.
Top performers use aggregated data and automation to a) ensure that claims are made promptly and b) to negotiate mutually profitable deals with their suppliers.
These top performing wholesale distribution companies don’t simply force manufactures for bigger rebates. Instead, those top performing distributors understand that sharing data with vendors has huge value:
Firstly, because vendors (manufacturers) strive to understand the market. What’s selling and what’s not? Where’s the market going? What product mix should we plan to make? Yet in several industry sectors – the building materials sector, for example – the manufacturers often don’t have direct contact with the end customer. Instead, they rely on data from their distribution channel.
Secondly, by jointly reviewing all the parameters of a deal, a negotiation can end up being more profitable for BOTH parties. Finding ways of reducing logistics costs, storage costs and other elements in return for adjustment in rebate percentages can deliver that true win-win scenario.
Suppose the distributor realises that their own fleet has spare capacity. They might suggest to the manufacturer that they deliver to a service hub instead of direct to all the branches. This cuts down the logistics costs for the manufacturer who can now afford to provide a larger rebate. But this calculation is only possible when all data on branch sales is available and the new rebate parameters can be accurately modelled.
Top performers understand how to maximise the VALUE of the data that they own.
So, some wholesalers are missing out on claims, and others are claiming but not taking full advantage of their data in negotiations. Is there a solution that takes care of all the challenges?
Before we investigate the solution, let’s take a closer look at some of the challenges with the most common types of vendor incentive claim.
Definitions and challenges
What is a rebate?
Rebates agreements are typically made annually based on forecasted sales across multiple product lines. Their use varies from industry to industry and there are variations around the world. In the UK building materials sector, rebates can make up more than 100% of a company’s profit.
Rebate agreements tend to be negotiated by the purchasing team. Typically, they will forecast demand and agree rebates based on those forecasts and goals set by suppliers. The rebates may be based on one or more pricing mechanisms, for example: a % of the sales price, a fixed amount on achieving a target sales volume, a tiered % based on sales volume.
Claims tend to be based around data about sales performance, which at first glance may sound rather simple. However, where multiple rebate agreements are in force, the data is spread across disparate systems and/or the distributor operates from more than one location, compiling the evidence needed to make a claim can be challenging.
What is a special pricing agreement?
A special pricing agreement is normally tied to particular circumstances. For example, a special pricing agreement may relate to a named customer and/or project, a set of products, a time period – or, typically, a combination of all of those elements.
A special pricing agreement may be created to supply boilers to a housebuilder for a particular project, or to supply building materials to a contractor across a range of projects in a particular geography.
A special pricing agreement can be negotiated between a sales person in the wholesaler and the manufacturer, or even directly between the end customer and the manufacturer. In the latter case, the manufacturer provides the deal to the wholesaler in return for them managing the distribution logistics.
Special pricing agreements are gaining in popularity and sales people at distribution companies will often try to get a special pricing agreement in place at an early opportunity in a competitive bidding situation. This helps them keep out other distributors who are competing to supply the same product.
The trick with special pricing agreement's is to know whether the special pricing agreement overrides or adds to any previously agreed annual rebates for that item.
For example, the procurement team may agree a tiered rebate for sales of a particular SKU of wall tiles. The sales team comes across an opportunity to sell a large volume to a developer and agrees an extraordinary discount with the manufacturer, specifically for that developer.
Accounting for stock that is part of the special pricing agreement and the stock that is subject to the rebate agreement can create a challenge.
What does ship and debit mean?
Ship and debit agreements account for the margin that the distributor would otherwise have lost by selling at a lower price, and are sometimes referred to as off-invoice discounts.
In order to keep an existing customer, or attract a new one the supplier and distributor may agree that a lower price is needed. Perhaps the customer is threatening to use goods from a competing supplier, or there is an opportunity to sell more / retain the customer if the price is lowered. Typically the distributor will approach the supplier with a business case for the price reduction and request margin support from the supplier.
When the agreement between the distributor and supplier is made, the distributor makes the sale and claims back the difference between the original price and the newly agreed price from the supplier.
The ship and debit claim is generally for that one-off agreement. The trick is to document the agreement, make the sale and then manage the claim quickly to avoid disputes.
From a systems perspective, the sale needs to be recognised as being associated with that ship and debit agreement in order to make accurate claims possible.
Ship and debit agreements sometimes take place on larger, bulky items that warrant being transported directly from the manufacturer to the end client. Plasterboard would be a good example here. The wholesaler has the opportunity to supply a large quantity of plasterboard to a builder, but the logistics make it more cost effective for the manufacturer to supply direct. In this case, the manufacturer provides a sum of money for the wholesaler for setting up the agreement, but the goods may never pass through the wholesaler’s warehouses.
The challenge for the distributor is making sure they claim the right amount. If the goods don’t physically pass through their premises they may not have any record of the movement of the goods in order to trigger the claim.
What are claim-backs?
A claim-back is similar to “Ship and Debit”. It is the claim that results from a ship and debit transaction.
What are contract support, MDFs (Market development funds) or Co-op funds?
These are funds made available by a manufacturer to pay for marketing carried out by the distributor(s). Often, these funds are used to support the promotion of a new product or a brand at a local level.
The agreement usually states the type of promotional work that the manufacturer is prepared to fund. The promotion itself can vary in nature and may be an email marketing campaign, an in store promotions, participation in TV advertising, or other form of advertising, marketing or PR.
Alternatively, the agreement may give free reign to the distributor to spend a set amount on a marketing campaign. However, in this case the manufacturer may limit proportion of marketing expenditure that can be claimed back, based on the end results (sales) from the campaign.
Claims against market development or co-op funds may take the form of discounted products, lump sum payments or volume based rebates.
In all cases, evidence is needed to support any claim. And as with other types of incentive, difficulties arise when that information is spread amongst multiple people and/or systems.
The challenges described above stem largely from the following basic issues:
1. Misunderstandings during the contract negotiation.
This can happen in two ways. Firstly, if the data upon which the negotiation is based is not 100% accurate, and secondly if there is a lack of control over the version of the trading agreement that is being signed off. These sound like very basic things to correct, but in businesses with thousands of SKUs, disparate systems and multiple people involved in negotiations, it is easy to see how mistakes can happen.
2. Agreements tend to be physical documents that are signed and filed away.
But, in order that rebate accountants, financial, procurement and others can accurately manage the claims process, those agreements need to be systematised. By systematised we mean, not simply stored on a shared drive accessible to all, but entered into a system that facilitates appropriate views of data against the agreement. For example, the rebate accountant may need a view that provides information about accruals, the financial people need information about what is to be claimed and when and the procurement team wants a good overview on performance.
3. Disparate data sources
Accurate claims rely on accurate data about sales made under those agreements. This information may be spread across goods received notes, dispatch notes and sales made. And to further complicate matters, the information may be spread across different systems.
4. Part numbers from suppliers are often different to the codes used internally.
This creates data problems, particularly when information is held in different places. A single system that provides a view of the data that is consistent whether viewed by the supplier or the distributor is key.
5. There may be multiple agreements for one item (e.g. an annual rebate deal operating at the same time as a special pricing agreement).
These often come about because different teams negotiate different types of deal. Whilst procurement may negotiate an annual rebate deal, the commercial team (or even the customer themselves) may push the manufacturer for a special pricing agreement.
All parties need to be clear what volume of product is counted towards the rebate threshold as opposed to the special pricing agreement.
(For more detail, you might like to read "10 reasons rebate accountants fail to claim 100% of rebate owed")
Whilst ERP systems provide some basic controls, the ever-increasing complexity of trading agreements means that most do not handle all requirements.
As a result, many businesses extract information into spreadsheets and rely on them to calculate their claims. It is clear that relying on a few people can result in one or more of the following issues:
- Poor knowledge across the business
- Misinterpretation of the deal metrics into a spreadsheet
- Missed data uploads
- Errors can only be spotted by those who understand the calculations, and they may have made the errors in the first place!
Out of a recognition of all these problems has arisen a new breed of software – the rebate management system. This is built on the following foundations:
- Collate all relevant data into one place (systematised data from all agreements and operational systems in the business)
- Automate data processing as much as possible e.g. calculating claims and accruals
- Provide information (not data, but workable information) in the format required by procurement, sales, finance and rebate accountants
Ask yourself these questions:
- Consider the value of these vendor monies in your business. In some companies, it can add up to hundreds of millions. What do you earn and what should you earn?
- Do you know if you are claiming for everything that you are owed? Or is it an assumption?
- Do you have an audit trail readily accessible for each claim?
- How many disputes do you have with suppliers over claims and what impact does that have on your supplier relationship?
- If you shared data with suppliers could you improve your relationship and negotiate mutually profitable deals? Do you know how much that could be worth?
If you don’t know the answer, or you answer “no” to any of the above, then it might be time to speak to a rebate management expert. They will help you determine if a rebate management system would help drive up margins and profitability whilst maintaining or improving supplier relationships.